SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 26, 1999.
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20028
VALENCE TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0214673
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Conestoga Way, Henderson, Nevada 89015
------------------------------------------
(Address of principal executive offices
including zip code)
(702) 558-1000
------------------------------------------
(Registrant's telephone number,
including area code)
------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock $0.001 par value 34,424,670 shares
------------------------------------ ----------------------------------
(Class) (Outstanding at December 26, 1999)
<PAGE>
<TABLE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 26, 1999
INDEX
<CAPTION>
PAGES
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of
December 26, 1999 and March 28, 1999.............................................3
Condensed Consolidated Statements of Operations and Comprehensive
Loss for the period from March 3, 1989 (date of inception) to
December 26, 1999 and for each of the three and
nine month periods ended December 26, 1999 and December 27, 1998.................4
Condensed Consolidated Statements of Cash Flows for the period
from March 3, 1989 (date of inception) to December 26, 1999 and
for each of the nine month periods
ended December 26, 1999 and December 27, 1998....................................5
Notes to Condensed Consolidated Financial Statements.............................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................23
</TABLE>
SIGNATURE
Page 2
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<TABLE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
-----
<CAPTION>
December 26, 1999 March 28, 1999
------------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,422 $ 2,454
Receivables 2,547 1,168
Inventory 1,484 0
Prepaid and other current assets 109 153
----------- ----------
Total current assets 35,562 3,775
Property, plant and equipment, net 29,623 34,071
Investment in joint venture 0 555
----------- ----------
Total assets $ 65,185 $ 38,401
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,905 $ 423
Accounts payable 3,649 1,648
Accrued expenses 2,990 4,207
Accrued royalties and license fees 1,750 1,000
Advances and deposits 700 1,881
Grant payable 1,952 1,958
Accrued compensation 459 442
----------- ----------
Total current liabilities 13,405 11,559
Deferred revenue 2,500 2,500
Long-term debt, less current portion 4,082 4,402
Long-term debt to stockholder 8,269 3,769
----------- ----------
Total liabilities 28,256 22,230
----------- ----------
Commitments and contingencies (Note 5)
Mandatorily redeemable convertible preferred stock
Authorized: 10,000,000 shares
Series A, $0.001 par value, Issued and outstanding: no shares and
7,500 shares at December 26, 1999 and March 28, 1999 0 4,514
(Liquidation value: $0)
Series B, $0.001 par value, Issued and outstanding: 3,500 and 7,500
shares at December 26, 1999 and March 28, 1999, respectively 2,093 3,702
(Liquidation value: $3,715)
Stockholders' Equity:
Common stock, $0.001 par value, authorized: 50,000,000 shares,
Issued and outstanding: 34,424,670 and 26,722,341 shares
at December 26, 1999 and March 28, 1999, respectively 34 27
Additional paid-in capital 221,042 166,457
Notes receivable from stockholder (4,862) (4,862)
Deficit accumulated during the development stage (182,031) (154,436)
Accumulated other comprehensive income 653 769
----------- ----------
Total stockholders' equity 34,836 7,955
----------- ----------
Total liabilities, mandatorily redeemable convertible
Preferred stock and stockholders'equity $ 65,185 $ 38,401
=========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
Page 3
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<TABLE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
(unaudited)
-----
<CAPTION>
Period from
March 3, 1989 Three Months Ended Nine Months Ended
(date of ----------------------------- -----------------------------
inception)
Through December 26, December 27, December 26, December 27,
December 26, 1999 1999 1998 1999 1998
------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Research and development
Contracts $ 21,605 $ - $ - $ - $ -
Battery and laminate sales 797 408 - 797 -
--------- -------- -------- -------- ----
Total revenue 22,402 408 - 797 -
Costs and expenses:
Research and product
development 128,093 7,896 5,866 21,441 14,604
Marketing 3,816 28 179 75
69
General and administrative 51,422 2,200 1,857 5,240 4,114
Write-off of in-process
Technology 8,212 - - - -
Investment in Danish subsidiary 3,489 - - - -
Special charges 18,872 - - - -
--------- -------- -------- -------- ------
Total costs and expenses 213,904 10,165 7,751 26,860 18,793
Operating loss (191,502) (9,757) (7,751) (26,063) (18,793)
Interest and other income 18,218 165 78 337 2,413
Interest expense (6,247) (480) (228) (1,314) (476)
Equity in earnings (loss) of
joint venture (2,500) - - (555) (287)
--------- -------- -------- -------- --------
Net loss $(182,031) (10,072) (7,901) (27,595) (17,143)
=========
Beneficial conversion feature
on preferred stock (76) (3,553) (507) (3,628)
======== ======== ======== =======
Net loss available to common
stockholders $(10,148) $(11,454) $(28,102) $(20,771)
======== ========= ======== ========
Other comprehensive loss:
Net loss $(10,072) $ (7,901) $(27,595) $(17,143)
Change in foreign currency
translation adjustments (526) (583) (116) (640)
-------- --------
Comprehensive loss $(10,598) $ (8,484) $(27,711) $(17,783)
======== ======== ======== ========
Net loss per share available to
common stockholders, basic and
diluted $ (0.32) $ (0.44) $ (0.98) $ (0.81)
======== ======== ======== ========
Shares used in computing net loss
per share available to common
stockholders, basic and diluted 31,461 25,931 28,687 25,601
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
Page 4
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<TABLE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share amounts)
(unaudited)
-----
<CAPTION>
Period from
March 3, 1989 Nine Months Nine Months
(date of inception) Ended Ended
through December 26, December 27,
December 26, 1999 1999 1998
------------------- ---------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(182,031) $ (27,595) $ (17,143)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 31,560 6,553 1,271
Write-off of equipment 16,061 1,269 -
Write-off of in-process technology 6,211 - -
Compensation related to stock options 3,560 - -
Non-cash charge related to acquisition of Danish
subsidiary 2,245 - -
Equity in (earnings) losses of joint venture 2,500 555 285
Amortization of debt discount 478 423 35
Changes in assets and liabilities:
Receivables (1,428) (1,379) 852
Prepaid expenses and other current assets (987) 44 907
Inventory (1,484) (1,484) -
Accounts payable 3,597 2,001 103
Accrued liabilities (165) (1,612) (1,512)
Deferred revenue 2,500 - -
--------- --------- ---------
Net cash used in operating activities (117,383) (21,225) (15,202)
--------- --------- ---------
Cash flows from investing activities:
Purchase of long-term investments (665,789) - -
Maturities of long-term investments 661,545 - -
Capital expenditures (68,578) (3,477) (7,537)
Other (222) - -
-------- --------- ---------
Net cash used in investing activities (73,044) (3,477) (7,537)
-------- --------- ---------
Cash flows from financing activities:
Property and equipment grants 6,421 - 2,009
Borrowings of long-term debt 26,952 6,950 2,169
Payments of long-term debt:
Product development loan (482) - -
Stockholder and director (6,173) - -
Other long-term debt (12,565) (331) (296)
Proceeds from issuance of common stock and warrants,
net of issuance costs 196,013 47,097 7,340
Proceeds from issuance of preferred stock, Series A,
net of issuance costs 7,075 - 6,040
Proceeds from issuance of preferred stock, Series B,
net of issuance costs 7,125 - 5,800
------- --------- ---------
Net cash provided by financing activities 224,366 53,716 23,062
------- --------- ---------
Effect of foreign exchange rates on cash and cash
equivalents (2,517) (46) (898)
------- --------- ---------
Increase (decrease) in cash and cash equivalents 31,422 28,968 (575)
Cash and cash equivalents, beginning of period - 2,454 8,400
------- --------- ---------
Cash and cash equivalents, end of period 31,422 $ 31,422 $ 7,825
======= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>
Page 5
<PAGE>
VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(unaudited)
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
These interim condensed consolidated financial statements are unaudited
but reflect, in the opinion of management, all normal recurring
adjustments necessary to present fairly the financial position of
Valence Technology, Inc. and subsidiaries (the Company) as of December
26, 1999, its consolidated results of operations for the period from
March 3, 1989 (date of inception) to December 26, 1999 and for each of
the three and nine-month periods ended December 26, 1999 and December
27, 1998, and the consolidated cash flows for each of the nine-month
periods ended December 26, 1999 and December 27, 1998, and for the
period from March 3, 1989 (date of inception) to December 26, 1999.
Because all the disclosures required by generally accepted accounting
principles are not included, these interim condensed consolidated
financial statements should be read in conjunction with the audited
financial statements and notes thereto in the Company's Annual Report
on Form 10-K as of and for the year ended March 28, 1999. The year end
condensed consolidated balance sheet data as of March 28, 1999 was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
We have produced prototype and production quality products that we
believe have performance characteristics that are suitable for a broad
market. However, additional development will be required to enable us
to consistently produce battery systems with these characteristics. The
Company presently has a limited quantity of products available for
sale. To achieve profitable operations, the Company must successfully
develop, manufacture, and market its products. There can be no
assurance that any products can be developed or manufactured at an
acceptable cost and with appropriate performance characteristics, or
that such products will be successfully marketed.
2. BASIS OF PRESENTATION:
The accompanying interim condensed consolidated financial statements
have been prepared assuming that the Company will continue as a going
concern. In December 1999, the Company completed a sale of stock for
total proceeds of approximately $32,000,000. However, the Company has
sustained recurring losses related primarily to the development and
marketing of its products, and the Company forecasts increased cash
needs to meet planned plant expansion to meet anticipated increased
sales. There can be no assurance that any new debt or equity issuance
could be successfully consummated. If anticipated sales are not
forthcoming in the first quarter of the next fiscal year, expenditures
would be reduced to conserve cash. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might result
from the outcome of this uncertainty. The effects of any such
adjustments, if necessary, could be substantial.
3. EARNINGS PER SHARE:
Earnings per share ("EPS") is computed by dividing net loss available
to common stockholders by the weighted average number of common shares
outstanding for that period. Diluted EPS is computed giving effect to
all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of incremental common
shares issuable upon conversion of preferred stock and exercise of
stock options and warrants for all periods.
The following is a reconciliation of the numerator (net loss) and
denominator (number of shares) used in the basic and diluted EPS
calculation:
Page 6
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DEC. 26, 1999 DEC. 27, 1998 DEC. 26, 1999 Dec. 27, 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss available
to common stockholders $ (10,148,000) $(11,454,000) $ (28,102,000) $ (20,771,000)
Weighted average
shares outstanding 31,461,000 25,931,000 28,687,000 25,601,000
Earnings per share,
basic and diluted $ (0.32) $ (0.44) (.98) (0.81)
</TABLE>
Shares excluded from the calculation of diluted EPS as their effect was
anti-dilutive were 9,633,000 and 6,707,000 for the three and nine months ended
December 26, 1999 and December 27, 1998, respectively.
4. LONG-TERM DEBT TO STOCKHOLDER:
In July 1997, the Company entered in to an amended loan agreement with
a stockholder which allows the Company to borrow, prepay and re-borrow
up to the full $10,000,000 principal under the promissory note on a
revolving basis and provided that the lender will subordinate its
security interest to other lenders when the loan balance is at zero.
The loan bears interest at one percent over lender's borrowing rate
(approximately 9.00% at December 26, 1999) and is available through
August 30, 2002.
During the first quarter of fiscal 2000, the Company borrowed an
aggregate of $5,450,000 from a stockholder under the amended loan
agreement bringing the outstanding loan balance to $9,950,000 as of
June 27, 1999. In conjunction with the borrowings, the Company issued
warrants to purchase 325,000 shares of common stock. The warrants were
valued using the Black Scholes valuation method and had a weighted
average fair value of $4.22 per warrant at the time of issuance. The
fair value of these warrants, totaling $1,372,000 has been reflected as
additional consideration for the debt financing, recorded as a discount
on the debt, and accreted as interest expense to be amortized over the
life of the amended loan agreement. For the nine months ending December
26, 1999, $423,000 was charged to interest expense.
5. COMMITMENTS AND CONTINGENCIES:
SECURITIES LITIGATION:
In May 1994, a series of class action lawsuits were filed in the United
States District Court for the Northern District of California against
the Company and certain of its present and former officers and
directors. These lawsuits were consolidated, and in September 1994, the
plaintiffs filed a consolidated and amended class action complaint.
Following the Court's Orders on motions to dismiss the complaint, which
were granted in part and denied in part, the plaintiffs filed an
amended complaint in October 1995 ("Complaint"). The Complaint alleges
violations of the federal securities laws against the Company, certain
of its present and former officers and directors, and the underwriters
of the Company's public stock offerings, claiming that the defendants
issued a series of false and misleading statements, including filings
with the Securities and Exchange Commission, with regard to the
Company's business and future prospects. The plaintiffs represent a
class of persons who purchased the Company's common stock between May
7, 1992 and August 10, 1994. The Complaint seeks unspecified
compensatory and punitive damages, attorney's fees, and costs.
On January 23, 1996, the Court dismissed, with prejudice, all claims
against the underwriters of the Company's public stock offerings, and
one claim against the Company and its present and former officers and
directors. On April 29, 1996, the Court dismissed with prejudice all
remaining claims against a present director and limited claims against
a former officer and director to the period when that person was an
officer. In December 1996, the Company and the individual defendants
filed motions for summary judgment, which the plaintiffs opposed. In
November 1997, the Court granted the motions for summary judgment and
entered judgment in favor of all defendants. Plaintiffs appealed to the
Ninth Circuit Court of Appeals, which heard argument in December 1998.
In April 1999,
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VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(unaudited)
the Ninth Circuit issued an opinion reversing the District Court's
order with respect to the grant of summary judgment and remanded the
case back to the District Court.
Pursuant to a recent order from the District Court, the trial in this
case has been set for July 2000. While plaintiffs have not specified
the precise amount of damages they are seeking, an unfavorable
resolution of the lawsuit would likely have a material adverse effect
on the Company's financial condition and results of operation.
OTHER LITIGATION:
In June 1998, the Company filed a lawsuit in the Superior Court of
California, Santa Clara County, against L&I Research, Inc., Powell
Electrical Manufacturing Company and others seeking relief based on
rescission and damages for breach of contract. In September 1998,
Powell filed a cross-complaint against the Company and others (File No.
CV7745534) claiming damages of approximately $900,000. The
cross-complaint alleges breach of written contract, oral modification
of written contract, promissory estoppel, fraud, quantum meruit, and
quantum valebant. On December 10, 1998, the Company filed a first
amended complaint for breach of contract, breach of express warranty,
breach of implied warranty of merchantability, breach of implied
warranty of fitness for particular purpose, and breach of the implied
covenant of good faith and fair dealing. On or about December 23, 1998,
Powell filed a first amended complaint again seeking damages of
approximately $900,000. To date, no trial date has been set in this
case.
In September 1998, Klockner Bartelt/Medipak, Inc. d/b/a/ Klockner
Medipak filed suit against the Company in the United States District
Court for the Middle District of Florida (File No. 98-1844-Civ-7-24E)
alleging breach of contract by the Company with respect to an agreement
for the supply of battery manufacturing equipment, and claimed damages
of approximately $2.5 million. On January 20, 1999, the Company filed a
counterclaim against Klockner alleging breach of contract, breach of
express warranty, breach of the implied warranty of merchantability,
breach of the implied warranty of fitness for a particular purpose, and
rescission and restitution and claimed compensatory damages to be
determined at trial. The case has been set for trial in March 2000.
The ultimate outcome of these actions cannot presently be determined.
Accordingly, no provision for any liability or loss that may result
from adjudication or settlement thereof has been made in the
accompanying consolidated financial statements.
In addition to the litigation noted above, the Company is from time to
time subject to routine litigation incidental to its business. The
Company believes that the results of this routine litigation will not
have a material adverse effect on the Company's financial condition.
6. SEGMENT INFORMATION:
The Company conducts its business in one operating segment and uses
only one measurement of profitability. Long-lived asset information by
geographic area at December 26, 1999 and March 28, 1999 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 26, 1999 March 28, 1999
------------------------ ----------------------
United States $ 5,023,000 $ 5,502,000
International (primarily Northern Ireland) 24,600,000 28,569,000
------------------------ ----------------------
TOTAL $ 29,623,000 $ 34,071,000
======================== ======================
</TABLE>
Page 8
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VALENCE TECHNOLOGY, INC. AND SUBSIDIARIES
(companies in the development stage)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(unaudited)
7. RECENT ACCOUNTING PRONOUNCEMENTS:
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133
establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the balance sheet, and that
the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on
the type of hedging relationship that exists. SFAS 133 will be
effective for fiscal years beginning after June 15, 2000. Currently,
the Company does not hold derivative instruments or engage in hedging
activities.
Powell
8. FINANCING:
On December 21, 1999, the Company entered into an agreement with
Capital Guardian Trust Company for the sale of 2,133,333 shares of the
Company's common stock, at a negotiated price of $15.00 per share, for
a total purchase price of $32,000,000. As of December 26, 1999, the
Company had received approximately $29,000,000 in exchange for
1,967,333 shares from certain client accounts of the purchaser.
During the quarter ended December 26, 1999, the Company became a
guarantor of a bank loan to Hanil Valence Co., Ltd., the joint venture
company formed in 1996 by the Company and Hanil Telecom Co., Ltd. The
maximum aount of borrowings available to Hamil Valence Co., Ltd. under
this loan is approximately $2,600,000.
9. SUBSEQUENT EVENTS:
On December 27, 1999 the company received the remaining $3,000,000 in
exchange for the remaining 166,000 shares, which completed the $32
million sale of stock to Capital Guardian Trust. In accordance with the
terms of the sale, the Company issued 2,133,333 shares of common stock.
On January 27, 2000, CC Investments elected to convert all of the
warrants issued December 18, 1998 as part of the Series "B" Preferred
Stock transaction. Their conversion was a cash-less conversion
resulting in the issuance of 348,979 shares of common stock on January
31, 2000.
The $1.5 million loan obtained from a major stockholder on October 18,
1999 was convertible to common stock at the holder's option. On
February 1, 2000, the note holder elected to convert the balance due
and accrued interest to common stock. In accordance with the terms of
the note, the Company issued 304,900 shares of common stock at the
conversion rate of $5.05 per share, which equals the ten-day average
closing stock price prior to the loan date.
Page 9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933. The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations of
such words are intended to identify forward-looking statements. Such statements
appear in a number of places in this report and include statements regarding our
intent, belief or current expectations with respect to, among other things, the
progress of our research and development activities, trends affecting our
liquidity position, including, but not limited to, our access to additional
equity or debt financing and our rate of expenditures, our plans to address the
Year 2000 problem, our joint venture relationships, the status of the
development of our products and their anticipated performance and customer
acceptance and our business and liquidity strategies. We caution you not to put
undue reliance on such forward-looking statements. Such forward-looking
statements are not guarantees of our future performance and involve risks and
uncertainties. Our actual results may differ materially from those projected in
this report, for the reasons, among others, our limited available working
capital, uncertain market acceptance of our products, changing economic
conditions, risks in product and technology development, and the other risks
discussed herein and in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. In addition to the risks and uncertainties discussed
above, in this report, and in our Annual Report on Form 10-K, our other filings
with the Securities and Exchange Commission contain additional information
concerning risks and uncertainties that may cause actual results to differ
materially from those projected or suggested in our forward-looking statements.
You should carefully review the risk factors discussed herein, in our Annual
Report on Form 10-K and in the other documents we have filed with the Securities
and Exchange Commission.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying condensed
consolidated financial statements and notes thereto contained herein and the
Company's consolidated financial statements and notes thereto contained in the
Company's Annual Report on Form 10-K as of and for the year ended March 28,
1999. The results for the three and nine-month periods ended December 26, 1999
are not necessarily indicative of the results to be expected for the entire
fiscal year ending March 26, 2000.
OVERVIEW
The Company was founded in 1989 to develop and commercialize advanced
rechargeable batteries based on lithium and polymer technologies. Since its
inception, the Company has been a development stage company primarily engaged in
acquiring and developing its initial technology, manufacturing limited
quantities of prototype batteries, recruiting personnel, and acquiring capital.
To date, other than immaterial revenues from limited sales of prototype
batteries and laminate, the Company has not received any significant revenues
from the sale of products. Substantially all revenues to date have been derived
from a research and development contract with the Delphi Automotive Systems
Group ("Delphi," formerly the Delco Remy Division), an operating group of the
General Motors Corporation, which expired in May 1998. The Company has incurred
cumulative losses of $182,031,000 from its inception to December 26, 1999.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED DECEMBER 26, 1999 (THIRD QUARTER AND FIRST
NINE MONTHS OF FISCAL 2000) AND DECEMBER 27, 1998 (THIRD QUARTER AND FIRST NINE
MONTHS OF FISCAL 1999).
As of December 26, 1999, from an accounting and reporting standpoint, the
Company is still classified as a "Development Stage" company. As a "Development
Stage" company, sales invoices principally related to joint venture partners
have not been recorded as revenue but have been recorded as reductions to
expense. Sales recorded as a reduction of expenses totaled $389,000 for
materials and batteries shipped through September 26, 1999. Sales of batteries
and laminate sales were $408,000 and $797,000 during the three and nine month
period ended December 26, 1999.
Research and development expenses were $7,896,000 and $21,441,000 during the
three and nine-month periods ended December 26, 1999 as compared to $5,866,000
and $14,604,000 during the same period of fiscal 1999. The increased
expenditures reflect the Company's efforts to commercialize a product, including
increases in purchasing, machine design engineering, testing, and production raw
materials for debugging equipment coupled with the loss of expense offsets
previously provided by Delphi.
Page 10
<PAGE>
Marketing expenses were $69,000 and $179,000 for the third quarter and first
nine months of fiscal year 2000, respectively, as compared to $28,000 and
$75,000 during similar periods of fiscal year 1999. The increased expenditures
are primarily the result of an increase in marketing department staffing
combined with extensive travel meeting with potential customers for the purpose
of product presentation.
General and administrative expenses increased to $2,200,000 and $5,240,000
during the third quarter and first nine months of fiscal year 2000,
respectively, from $1,857,000 and $4,114,000 for comparable periods in fiscal
1999. The increase between comparable periods is due primarily to higher
expenditures for legal services, completion of the senior management team, and
increased international travel to complete product commercialization.
Interest and other income were $165,000 and $337,000 for the third quarter and
first nine months of fiscal 2000, respectively, as compared to $78,000 and
$2,413,000 for the corresponding periods in fiscal 1999. The increase for the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999 is due
to interest accrued on debt from a stockholder. The decrease between the
comparable nine month periods of fiscal 2000 and fiscal 1999 is primarily the
settlement payment of $2.2 million from Delphi received during the second
quarter of fiscal 1999.
Interest expense increased to $480,000 and $1,314,000 during the third quarter
and first nine months of fiscal year 2000, respectively, from $228,000 and
$476,000 for the comparable periods in fiscal 1999. This increase is a result of
expenses associated with the utilization of a line of credit from a principal
stockholder, which includes accrued interest and accretion of debt discount.
The Company recognized joint venture losses of $0 and $0 for the third quarter
of fiscal 2000 and fiscal 1999, respectively, as well as a loss of $555,000 for
the first nine months of fiscal 2000 as compared to a loss of $287,000 for the
comparable period in fiscal 1999. These losses are due primarily to start-up
costs and foreign currency valuations. The Company's joint venture income or
loss is 50% of the net income or loss incurred by Hanil-Valence Co., Ltd., with
losses recorded up to the Company's investment in the joint venture.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $21,225,000 net cash for operating activities during the first
nine months of fiscal year 2000 compared to using $15,202,000 during the first
nine months of fiscal year 1999, an increase between comparable periods of
$6,023,000. This increase resulted primarily from the intensification of efforts
to complete product development, expand and train production staff, expand
marketing staff and efforts, and completing engineering efforts on production
facilities.
During the nine months ended December 26, 1999, the Company used $3,477,000 net
cash from investing activities compared to $7,537,000 during the nine months
ended December 27, 1998, a decreased usage of $4,060,000 between comparable
periods. The usage in both periods was comprised solely of capital expenditures.
The Company provided $53,716,000 net cash from financing activities during the
first nine months of fiscal year 2000 compared to $23,062,000 during the same
period of fiscal 1999. This increase of $30,654,000 resulted from additional
borrowing on a line of credit from a principal stockholder and the sale of
common stock to institutional investors.
As a result of the above, the Company had a net increase in cash and cash
equivalents of $28,968,000 during the nine months ended December 26, 1999,
whereas it had a net decrease in cash and cash equivalents of $575,000 during
the nine months ended December 27, 1998.
During fiscal year 1994, the Company, through its Dutch subsidiary, signed an
agreement with the Northern Ireland Industrial Development Board (IDB) to open
an automated manufacturing plant in Northern Ireland in exchange for capital and
revenue grants from the IDB. The Company has also received offers from the IDB
to receive additional grants. The grants available under the agreement and
offers, for an aggregate of up to (pound)27,555,000, generally become available
over a five-year period through October 31, 2001. As of December 26, 1999, the
Company had received grants aggregating (pound)4,080,000 reducing remaining
grants available to (pound)23,475,000 ($37,938,000 as of December 26, 1999).
As a condition to receiving funding from the IDB, the subsidiary must maintain a
minimum of (pound)12,000,000 in debt or equity financing from the Company.
Aggregate funding under the grants was limited to (pound)4,080,000 until the
Company had recognized $4,000,000 in aggregate revenue from the sale of its
batteries produced in Northern Ireland. An amendment to the agreement with the
IDB permits the Company to receive (pound)500,000 (approximately $808,000) after
achieving sales of batteries
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manufactured by the Northern Ireland operation of at least $1,500,000. An
additional (pound)500,000 is available when the total related sales reach
$2,500,000.
The amount of the grants available under the agreement and offers is primarily
dependent on the level of capital expenditures made by the Company.
Substantially all of the funding received under the grants is repayable to the
IDB if the subsidiary is in default under the agreement and offers, which
includes the permanent cessation of business in Northern Ireland. Funding
received under the grants to offset capital expenditures is repayable if related
equipment is sold, transferred or otherwise disposed of during a four year
period after the date of grant. In addition, a portion of funding received under
the grants may also be repayable if the subsidiary fails to maintain specified
employment levels for the two year period immediately after the end of the five
year grant period. The Company has guaranteed the subsidiary's obligations to
the IDB under the agreement.
There can be no assurance that the Company will be able to meet the requirements
necessary for it to receive and retain grants under the IDB agreement and
offers.
The major components of construction in progress with their estimated costs and
start dates are as follows: mixing, coating, etching, laminating and slitting
equipment, $2,681,000, March 1997; assembly equipment, $8,878,000, March 1994;
extraction, packaging, and conditioning equipment, $891,000, August 1993; and
factory improvements and miscellaneous equipment, $726,000, June 1997. The
estimated completion date for these major categories of construction in progress
is the end of fiscal year 2000. These statements are forward-looking statements,
and actual costs and completion dates are subject to change due to a variety of
risks and uncertainties, including the availability of funds for completion, the
risk that actual costs will be materially greater due to unforeseen difficulties
in completion of the projects, reliance on manufacturers to deliver equipment in
a timely manner and that performs as intended, and other risks and
uncertainties.
During October 1999, Castle Creek Investments, LDC elected to convert all 7,500
shares of their Series A Convertible Participating Preferred Stock. These 7,500
shares of Series A stock, including the accreted redemption value through the
date of conversion, converted to 1,335,000 shares of Valence Technology, Inc.
common stock.
On October 18, 1999, the Company obtained a loan in the amount of $1.5 million
from a major stockholder. The loan is in the form of a demand note such that the
holder can request payment after January 31, 2000 or convert the loan and
accrued interest to common stock. The conversion rate is $5.05, which equals the
ten-day average closing stock price prior to the loan date. The interest rate is
9% per annum.
On October 28, 1999, the Company sold 677,000 shares of its common stock to an
institutional investor raising an aggregate of $3 million.
On November 3, 1999, Castle Creek Investments, LDC elected to convert 1,000
shares of their Series B Convertible Participating Preferred Stock. These 1,000
shares of Series B stock, including the accreted redemption value through the
date of conversion, converted to 226,000 shares of Valence Technology, Inc.
common stock.
On November 30, 1999, the Company sold 596,000 shares of its common stock to an
institutional investor raising an aggregate of $3.5 million.
On December 21, 1999, Valence Technology, Inc. (the "Company") entered into an
agreement (the "Stock Purchase Agreement") with Capital Guardian Trust Company
(the "Purchaser"), on behalf of certain client accounts of the Purchaser, for
the sale of 2,133,333 shares (the "Shares") of the Company's common stock (the
"Common Stock"), $.001 par value, at a negotiated price of $15.00 per share, for
a total purchase price of $32,000,000. The Company completed the issuance of the
Shares on December 27, 1999. The purchase price of the Shares was determined
based on the average closing sales price of the Common Stock for the twenty
calendar days prior to the execution of the Stock Purchase Agreement. In
connection with the Stock Purchase Agreement and the sale of the Shares, the
Company entered into a Placement Agency Agreement dated as of December 21, 1999
(the "Placement Agency Agreement"), pursuant to which the Company engaged CIBC
World Markets Corp. as its exclusive placement agent (the "Placement Agent") and
agreed to pay the Placement Agent a fee of $1,600,000 in consideration of its
services. In addition, the Company agreed to reimburse the Placement Agent for
its expenses, in an amount not to exceed $40,000. The Company estimates that the
total expenses it will incur in connection with the sale of the Shares,
including the above finder's fee and legal and accounting fees, will be
approximately $1,675,000.
As of December 27, 1999, the end of the quarter, the Company had received
$29,300,000 of the funds from this stock transaction. The remaining $2,700,000
of funds of the $32 million stock sale were received as of December 28, 1999.
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The Company expects that its existing funds and financings listed in the
subsequent events section of this report (Note 9) will be sufficient to fund the
Company's operations through the first quarter of fiscal 2001. After taking into
account projected revenues and receipt of funds from other sources, we may need
to raise additional funds through either a debt or equity financing to fund
capital expenditures expansion, research and product development, marketing and
general and administrative expenses and to pursue joint venture opportunities
through the remainder of fiscal 2001. The Company is currently reviewing the
business plans and roll out schedule to determine the optimum plan. There can be
no assurance that funds for these purposes, whether from equity or debt
financing agreements with strategic partners or other sources, will be available
on favorable terms, if at all. If we cannot raise additional funds, further
development and production of our batteries may be delayed, we may not be able
to increase personnel in our sales and marketing departments or otherwise
execute our business plan, all of which may have a material adverse effect on
our operations and financial condition. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. The effects of such adjustments, if necessary, could be material.
YEAR 2000 COMPLIANCE
Many existing software programs, computers and other types of equipment were not
designed to accommodate the Year 2000 and beyond. If not corrected, these
computer applications and equipment could fail or create erroneous results. For
Valence, this could disrupt purchasing, manufacturing, sales, finance and other
support, thereby causing potential lost sales and additional expenses.
OUR STATE OF READINESS
Our Year 2000 ("Y2K") project encompasses both information and non-information
systems within Valence as well as the investigation of the readiness of our
strategic suppliers/vendors. We have created a Year 2000 Project Team that is
responsible for planning and monitoring all Year 2000 activities and reporting
to our executive management. It has been reviewing Valence's Year 2000 status
for approximately nine months now, and has identified and evaluated crucial
areas of concern regarding Year 2000 compliance. We define Year 2000 compliance
to be, with respect to information technology, that the information technology
accurately processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1999 and 2000 and leap year calculations,
to the extent that other information technology, used in combination with the
information technology being acquired, properly exchanges date/time data with
it. Fixes have begun on a majority of these areas. Other areas are still being
tested. Our goal is to have all Year 2000 issues resolved by December 31, 1999.
To that end, we have inventoried and assessed the Year 2000 readiness of the
following:
VENDORS/SERVICE PROVIDERS. We have distributed letters and questionnaires
to all vendors and service providers that are critical to the day-to-day
operations of Valence. Of these letters and questionnaires, 24% have responded
as being compliant. Letters have been distributed a second time to vendors and
service providers that either did not respond initially or responded as not to
be in compliant at that time. The second letter elicited information necessary
to change key vendors.
ENVIRONMENTAL, HEALTH, SAFETY AND SECURITY SYSTEMS. We have been advised by
Statewide Fire Electronics that the fire alarm systems within our plant are Y2K
compliant. These systems are dependent on our electric utility company, Nevada
Power, but are equipped with 24-hour back-up battery.
A Nevada Power representative informed the Company that when Y2K approaches, it
will be off the national grid and will be on its own power. Two generating
stations power Nevada Power, one is coal powered and the other is gas powered.
The Company believes that Nevada Power has a sufficient amount of coal for the
coal-powered station. The other station, which is gas powered, will be dependent
on Southwest Gas.
If there is a disruption in electrical service, our back-up generator will
provide light and ventilation to critical areas of our US facility as well as
providing power for our telephone system.
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Our sprinklers, risers, and hydrant systems are not electrical and our fire
system is in compliance. Should it become necessary, our emergency lights are
powered by battery back-up for sufficient time to allow our employees to
evacuate the facility.
The Henderson Fire Department has advised the Company that it is Y2K compliant.
As part of its disruption preparations, it is planning to have additional
manpower working and a spare fuel truck on site. In the event of a power outage,
the Fire Department will staff local recreation centers with personnel equipped
with radios. In the event of an emergency, or if phone service is disrupted, we
will be able to go to the manned recreation center closest to Valence which is
the Black Mountain Recreation Center on Horizon.
We will be closed during Y2K but security guards, which are on duty when the
facility is closed, will continue to maintain the building. The security
computer that regulates badge entry into the building has been backdated to 1993
and has been operating adequately. We are furnishing the guards with extra
chains and padlocks in the event the doors need to be secured manually and are
providing bottled drinking water for their use. We anticipate no security
issues.
Conclusion: There are no known areas of concern as related to EHS functions.
OPERATIONS AND PROCESS EQUIPMENT. In reviewing the compliance of all
operations and process equipment in the Henderson facility, no compliance issues
where found. Statements from equipment vendors were obtained to verify this
conclusion.
PERSONAL COMPUTERS. All personal computer BIOSs' (basic input/output
systems) are being tested for Y2K compliance. Currently 100% of all Novell
network servers are Year 2000 compliant. Currently 100% of all user workstations
are known to have a Y2K BIOS. Currently 75% of the personal computers that
operate equipment have been tested. Only 2% of these have a Y2K compliant BIOS.
We have patched the computers that are not Year 2000 compliant with a TSR, a
software program that loads at computer startup, that will report the correct
date and time to the operating system. This method has been tested and provides
acceptable results.
All Northern Ireland primary engineering drawing software is fully compliant as
well as our general office software, which has been upgraded to Microsoft Office
97, which is compliant. Our Fourth Shift manufacturing system in its current
16-bit database form is not compliant. An upgrade to the 32-bit database was
completed in December 1999 at a cost of (pound)10k (approximately $16,161).
LABORATORIES. The Maccor lab has been completely upgraded and patched for
Y2K compliance. The electrical chemistry lab has been completely upgraded and
patched for Y2K compliance with the exception of the data acquisition software.
The data acquisition software run by these machines has been tested and we have
concluded that there is a minor Y2K bug. Because data is not calculated by date,
this does not affect the ending results of the data. The US quality control lab
is 100% compliant. The Northern Ireland lab is 100% complete for BIOS and
operating system testing and fixes. Lantastic Network Version 5, which networks
the Maccor cyclers, is not compliant. Lantastic Version 8 has been purchased and
is being installed (currently 75% complete).
The Northern Ireland dedicated PCs for QC lab equipment have also been BIOS
checked and are now all compliant. All software that interfaces with instruments
is being checked, with 80% so far responding as compliant. One instrument was
found not to be compliant and has been replaced.
AUTOMATED MACHINERY. The manufacturing machinery is controlled primarily by
PLCs (Programmable Logic Controllers) and in some cases an industrial PC is
added as the MMI (Man Machine Interface). Not all PLCs are date aware (their
function also does not require it) and therefore would not be affected. We are
currently tracking 40 systems which fall in this category, 35 of which have
already been fully certified and 5 with known issues. The five systems with
known issues require a software upgrade which will cost (pound)2,500 ($4,040)
each. Automated equipment has been tested for date rollover, and found to be
compliant, in the following sections: liquids, mixing, lamination, bi-cell
assembly, stack and connect, packaging, folding, and conditioning. The coating
and final test sections are being tested at this time.
IN-HOUSE SYSTEMS. One database has been tested and is known not to be
compliant. A programmer was hired to rewrite the database in another platform
making it Y2K compliant in December 1999. All other databases at the US facility
are Y2K compliant, and the Year 2000 Project Team is reviewing the databases at
the Northern Ireland facility. The accounting software has been upgraded to the
compliant version of the software. The badge security system is not compliant
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and will need to be replaced or fixed. At present, the system has been backdated
to 1993 and there are no apparent problems with this fix. There is no critical
data or integration that will be affected by this change. A task force has been
assembled and will look into issues that may have been overlooked and to help
continue the efforts to make our facilities compliant. Valence's telephone
system has been upgraded and is now compliant. The e-mail system has been
replaced with a compliant version. The Voice Mail system is not Y2K compliant. A
new voice mail system has been purchased and will be installed prior to
year-end. Microsoft Office 97 has been implemented throughout the facility and
is patched with Microsoft's latest patches. A new backup system has been
purchased and is being implemented to replace a backup system that is Y2K
compliant but will not be supported after December 31, 1999.
COSTS TO ADDRESS THE YEAR 2000
Spending for modifications and updates is being expensed as incurred and is not
expected to have a material impact on our results of operations or cash flows.
The cost of our Year 2000 project is being funded through available funds. We
estimate that our total Year 2000 expenditures will not be material. Through the
end of fiscal 1999, Valence had incurred $40,000 in connection with its Year
2000 compliance program, and is expected to incur approximately $60,000
additional during fiscal 2000.
RISK ANALYSIS
Like most business enterprises, we are dependent upon our own internal computer
technology and rely upon the timely performance of our suppliers/vendors. A
large-scale Year 2000 failure could impair our ability to timely complete our
research and development, or deliver batteries with the exacting specifications
that will be required by our customers, thereby causing potential lost sales and
additional expenses, which would have a material adverse effect on Valence, its
financial condition and its results of operations. Our Year 2000 project seeks
to identify and minimize this risk and includes testing of our in-house
applications, purchased software and embedded systems to ensure that all such
systems will function before and after the Year 2000. We are continually
refining our understanding of the risk the Year 2000 poses to our
suppliers/vendors based upon information obtained through our surveys. This
refinement will continue through the rest of 1999.
CONTINGENCY PLANS
Our Year 2000 project anticipates the development of contingency plans for
business critical systems and manufacturing equipment as well as for
suppliers/vendors to attempt to minimize disruption to our operations in the
event of a Year 2000 failure. We have not yet developed these plans, but will be
formulating plans to address a variety of failure scenarios, including failures
of our in-house applications, as well as failures of suppliers/vendors. Valence
does not have an estimated completion date for its contingency plans.
CAUTIONARY STATEMENT
Year 2000 issues are widespread and complex. While we believe we will address
them on a timely basis, we cannot assure that we will be successful or that
these problems will not materially adversely affect our business or results of
operations. To a large extent, we depend on the efforts of our suppliers and
other organizations with which we conduct transactions to address their Year
2000 issues, over which we have no control. The statements regarding the
expected outcome and timing of Year 2000 efforts are forward-looking statements.
Actual results could differ materially from our expectations due to unforeseen
problems arising in connection with completion of our Year 2000 program, the
risk that we will fail to identify a Year 2000 problem critical to the
operations of Valence, or that our vendors/suppliers will suffer problems that
will inhibit them from delivering their products to us on a timely basis.
RISK FACTORS AND FORWARD LOOKING INFORMATION
WE MAY HAVE A NEED FOR ADDITIONAL CAPITAL. At December 26, 1999, we had cash and
cash equivalents of $31,422,000. After taking into account our cash and cash
equivalents, projected revenues and receipt of funds from other sources, we may
need to raise additional funding through debt or equity financing through fiscal
2001 to complete funding of planned capital expenditure expansion, research and
product development, marketing and general and administrative expenses and to
pursue joint venture opportunities. Our cash requirements, however may vary
materially from those now planned because of changes in our operations,
including changes in original equipment manufacturer (OEM) relationships or
market conditions. There can be no assurance that additional funds for these
purposes, whether from equity or debt financing agreements, will be available on
favorable terms, if at all. If we cannot raise additional funds, further
development and production of our batteries may be
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delayed, we may not be able to increase personnel in our sales and marketing
departments or otherwise execute our business plan, all of which may have a
material adverse effect on our operations and financial condition. In addition,
if any of the risks described in "Risk Factors' do occur, such as additional
costs resulting from an adverse judgment or settlement of litigation, we may
need to obtain additional funds to enable us to continue operations and execute
our business plan beyond the first quarter of fiscal 2001. Our financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. The effects of these adjustments, if necessary, could be
material.
WE ARE A DEVELOPMENT STAGE COMPANY WITH A LIMITED QUANTITY OF PRODUCTS CURRENTLY
AVAILABLE FOR SALE. We are a development stage company and cannot anticipate
when, or if, we will ever have significant revenues from a product. We have
derived our revenues primarily from a research and development contract with
Delphi Automotive Systems Group, which we completed in May 1998. We presently
have limited quantities of commercially developed and manufactured products
available for sale. If we cannot rapidly increase our production capabilities to
make commercially acceptable product, we may not be able to fulfill existing
purchase orders in a timely manner or at all, and we may not be able to procure
additional purchase orders, in which event, our business and financial condition
would be materially adversely affected.
OUR CURRENT AVAILABLE CAPITAL AND FUTURE REVENUES, IF ANY, WILL NOT BE
SUFFICIENT TO MEET OUR FUTURE OPERATING NEEDS. We have generally incurred
operating losses since inception in 1989 and had an accumulated deficit of
$182,031,000 as of December 26, 1999. We may never achieve or sustain
significant revenues or profitability in the future. We have negative working
capital and have sustained recurring losses related primarily to the research
and development and marketing of our products. We expect to incur significant
losses in the future, as we continue our product development, begin to build
inventory and continue our marketing efforts. We will need to secure additional
financing in order to continue operations and execute our business plan,
including planned capital expenditures beyond the first quarter of fiscal 2001,
unless we begin to generate significant operating revenue. We will have to
continue to devote a significant amount of management time to obtaining
financing.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING, IN WHICH CASE WE WOULD NEED
TO REDUCE DEVELOPMENTAL EFFORTS AND MAY NOT BE ABLE TO COMMERCIALIZE OUR
PRODUCTS. If we are unable to achieve profitability or we are unable to secure
additional financing on acceptable terms, we will be unable to continue to fund
our operations. We are parties to an agreement pursuant to which we are entitled
to capital grant advances from the Northern Ireland Industrial Development Board
once we obtain cumulative revenues from the sale of batteries of $4 million. We
may not achieve these cumulative revenues over the short-term, or at all.
Additionally, a lack of capital may require us to license to third parties
rights to commercialize products or technologies that we might otherwise seek to
develop ourselves, and to scale back or eliminate our research and product
development programs. The unavailability of adequate funds would preclude us
from continuing to redesign and modify our manufacturing facility, ramp up our
sales and marketing staff and otherwise execute our business plan, all of which
would have a material adverse effect on our business, financial condition, and
results of operations.
WE ARE INVOLVED IN LAWSUITS THAT COULD NEGATIVELY IMPACT OUR BUSINESS. We
currently have three substantial lawsuits in which we are involved. The first is
a class action lawsuit by a class of persons who purchased our common stock
between May 7, 1992 and August 10, 1994, alleging that we violated federal
securities laws and seeking unspecified compensatory and punitive damages,
attorneys' fees and costs for claimed misstatement of our stock price in the
public offering and open market purchases of stock during that period. The
complaint names the Company as a defendant as well as some of our present and
former officers and directors, asserting that the Company and those individuals
violated federal securities laws by misrepresenting and failing to disclose
certain information about the Company's business during the class period. The
second involves a claim by a manufacturer of one of our pieces of manufacturing
equipment that we owe it approximately $2.5 million; in this action, we have
filed a counterclaim against the manufacturer seeking damages to be determined
at trial. The third is a contract claim that we instituted against several
parties; one party has filed a counterclaim against us and third parties
claiming damages of approximately $900,000 based on breach of a contract, and
this matter is presently stayed pending settlement discussions. Although we
intend to defend vigorously the claims against us in each of these lawsuits, if
any of them is resolved unfavorably to us we may be required to pay substantial
monetary damages which would have a material adverse effect on our financial
condition, results of operations and cash flows. In addition, our defense of
these actions has, and may continue to, result in substantial costs to us, as
well as requiring the significant dedication of management resources. If we
choose to settle any of these lawsuits, the settlement costs could also have a
significant effect on our cash resources and our financial condition.
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WE MAY NOT BE ABLE TO COST-EFFECTIVELY MANUFACTURE OUR BATTERIES. To be
successful, we must manufacture commercial, high-quality quantities of our
products at competitive costs. To date, we have produced limited quantities of
prototype and production quality products that we believe have performance
characteristics that are suitable for a broad market. However, additional
development will be required to enable us to produce battery systems with these
characteristics from our manufacturing line. In addition, to facilitate broad
commercialization of our products, we will need to reduce our manufacturing
costs. Our batteries may not be manufacturable in long-run commercial quantities
to the performance specifications demanded by customers. We must still be able
to competitively manufacture these batteries. Our current manufacturing
technology will need to be more fully developed before we will be able to
manufacture our batteries in commercial quantities. We must be able to
substantially raise yields of commercial quality batteries in commercial
quantities in order to cost effectively produce our batteries. Failure to
achieve substantially increased yields of our batteries and reduce
unit-manufacturing costs will preclude us from offering our batteries at a
competitive price to the public and therefore cause a material adverse effect on
our business, results of operations and financial condition. If we manufacture
our batteries in commercial quantities and they fail to perform as expected, our
reputation could be severely damaged, and we could lose existing or potential
future business, which would have a material adverse effect on our ability to
market our batteries even if the defect were corrected.
BECAUSE OUR BATTERIES ARE ONLY SOLD WHEN INCORPORATED INTO OTHER PRODUCTS, WE
RELY ON ORIGINAL EQUIPMENT MANUFACTURERS TO COMMERCIALIZE OUR PRODUCTS. To be
successful, our batteries must gain broad market acceptance. In addition, our
success will depend significantly on our ability to meet OEM customer
requirements by developing and introducing on a timely basis new products and
enhanced or modified versions of our existing products. OEMs often require
unique configurations or custom designs for battery systems, which must be
developed and integrated in the OEM's product well before the product is
launched by the OEM. Thus, there is often substantial lead-time between the
commencement of design efforts for a customized battery system and the
commencement of volume shipments of the battery system to the OEM. If we are
unable to design, develop and introduce products that meet OEMs' and other
customers' exacting requirements on a timely basis, we may not be able to
fulfill our obligations under existing purchase orders, we may lose
opportunities to enter into additional purchase orders and our reputation may be
damaged, all of which would have a material adverse effect on our business,
results of operations and financial condition. In addition, to determine the
requirements of each specific application, we will be dependent upon OEMs and
other intermediaries such as battery pack designers into whose products our
batteries will be incorporated. We may not receive adequate assistance from OEMs
to successfully commercialize our products.
WE MUST EXPAND OUR SALES STAFF, SUPPORT CAPABILITIES AND DISTRIBUTION CHANNELS
TO DISTRIBUTE OUR PRODUCTS ON A COMMERCIAL SCALE. To implement our strategy
successfully, we will have to increase our staff, including personnel in sales
and marketing, engineering, development and product support capabilities, as
well as third party and direct distribution channels. We may not be able to
sufficiently increase our staff or product support capabilities, or be
successful in our sales and marketing efforts. Failure in any of these areas
could have a material adverse effect on our business and results of operations.
WE ARE IN THE EARLY STAGE OF MANUFACTURING, AND IF WE ARE UNABLE TO DEVELOP
MANUFACTURING CAPABILITIES IN A COST EFFECTIVE MANNER, WE WILL NOT BE ABLE TO
GENERATE PROFITS. To date, we have not manufactured batteries on a commercial
scale. Until recently, our batteries only have been manufactured on our pilot
manufacturing line, which is able to produce prototype cells in quantities
sufficient to enable customer sampling and testing and product development. We
are currently in the early stages of transitioning production to an automated
high volume production line that will work with our newest battery technology in
our manufacturing facility in Mallusk, Northern Ireland. The redesign and
modification of the manufacturing facility, including its customized
manufacturing equipment, will continue to require substantial engineering work
and capital expenses and is subject to significant risks, including risks of
cost overruns and significant delays. In addition, in order to rapidly scale up
the manufacturing capacity, we will need to begin fabrication of a second
automated production line before completing full qualification of the first
line. In automating, redesigning and modifying the manufacturing processes, we
have been, and will continue to depend on, several developers of automated
production lines, which have limited experience in producing equipment for the
manufacture of batteries. A key determinant of our current and future production
capacity and profitability is the production yield of our manufacturing process.
To date, we have not achieved production yields sufficient to sustain commercial
production of our batteries. In 1993, we entered into a purchase order for $100
million of our batteries, which incorporated a previous technology, that we were
unable to fulfill due to our inability to commercially produce our batteries
pursuant to the customer's specifications. We must be able to substantially
raise yields of commercial quality batteries in commercial quantities in order
to cost effectively produce our batteries. Any failure to achieve substantially
increased yields of our batteries and reduce unit-manufacturing costs could have
a material adverse effect on our business, results of operations and financial
condition. As part of our manufacturing ramp-up, we will need to hire and train
a substantial number of new manufacturing workers. The availability of skilled
and unskilled workers
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in Northern Ireland, the site of our manufacturing facility, is limited due to a
relatively low unemployment rate. We may not successfully develop improved
processes, design required production equipment, enter into acceptable contracts
for the fabrication of such equipment, obtain timely delivery of such equipment,
implement multiple production lines or successfully operate the Mallusk
facility. We may not be able to successfully automate our production on a timely
basis, if at all, and such automation may not result in greater manufacturing
capacity or lower manufacturing costs than our pilot production line. Customer
relationships could be damaged if we fail to begin volume manufacturing on a
timely basis or at all. Such failure could cause lost opportunities and have a
material adverse effect on our business, results of operations and financial
condition.
WE ARE EXPERIENCING DELAYS IN QUALIFYING OUR MANUFACTURING FACILITIES. We have
been unable to meet our prior schedules regarding delivery, installation,
de-bugging and qualification of the Northern Ireland facility production
equipment. As most of the production equipment is being specially manufactured
for us, further problems may develop and cause further delay in our current
schedules. We are modifying and bringing many of the manufacturing processes
that we are implementing in this production equipment up to date for the first
time from our laboratory scale prototype work. We may need to further refine the
processes, which could cause substantial delays in the qualification and use of
this equipment. Furthermore, if we are able to refine our process, we may not be
able to produce the required amount of qualification samples to potential
customers. From our discussions with potential customers, we expect that
customers will require an extensive qualification period once the customer
receives its first commercial product off a production line.
WE DEPEND ON SOLE OR LIMITED SOURCE SUPPLIERS FOR CERTAIN KEY RAW MATERIALS TO
DEVELOP AND MANUFACTURE OUR BATTERIES. We depend on sole or limited source
suppliers for certain key raw materials used in our products. We generally
purchase sole or limited source raw materials pursuant to purchase orders placed
from time to time and have no long-term contracts or other guaranteed supply
arrangements with our sole or limited source suppliers. Our suppliers may not be
able to meet our requirements relative to specifications and volumes for key raw
materials, and we may not be able to locate alternative sources of supply. We
may not be able to purchase raw materials at an acceptable cost. In addition,
the raw materials which we utilize must be of a very high quality, and we have
in the past experienced delays in product development due to the delivery of
nonconforming raw materials from our suppliers. If we are unable to obtain high
quality raw materials in sufficient quantities and on a timely basis, our
production of batteries may be delayed which will have a material adverse effect
on our business and results of operations.
OUR BATTERIES MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE. To
achieve market acceptance, our batteries must offer significant performance
advantages at a cost effective rate as compared to other current and potential
alternative battery technologies in a broad range of applications. Our batteries
may not be able to achieve or sustain these advantages. Even if our batteries
provide meaningful price or performance advantages, there is a risk our
batteries may not be able to achieve or maintain market acceptance in any
potential market application. The success of our products also will depend upon
the level of market acceptance of OEMs' and other customers' end products that
incorporate our batteries, a circumstance over which we have little or no
control. If our batteries do not achieve and maintain significant performance
advantages at a cost effective rate over other technologies and achieve
significant and sustained market acceptance, or if customers' applications which
incorporate our products do not achieve lasting market acceptance, our business,
results of operations and financial condition could be materially adversely
affected.
THERE HAS BEEN, AND CONTINUES TO BE, A RAPID EVOLUTION OF BATTERY TECHNOLOGIES.
The battery industry has experienced, and is expected to continue to experience,
rapid technological change. Various companies are seeking to enhance traditional
battery technologies, such as lead acid and NiCad, and other companies have
recently introduced or are developing batteries based on nickel metal hydride
("NiMH"), lithium and other emerging and potential technologies. While these
competitors are engaged in significant development work on these various battery
systems, we believe that much of this effort is focused on achieving higher
energy densities for low power applications such as portable electronics. One or
more new, higher energy rechargeable battery technologies could be introduced
which could be directly competitive with, or be superior to, our technology. The
capabilities of many of these competing technologies have improved over the past
several years, which have resulted in a customer perception that our technology
may not offer as many advantages as previously anticipated. Competing
technologies that outperform our batteries could be developed and successfully
introduced and, as a result, there is a risk that our products may not be able
to compete effectively in our targeted market segments.
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OUR COMPETITORS MAY DEVELOP BATTERIES SIMILAR OR SUPERIOR TO OURS OR OTHERWISE
COMPETE MORE SUCCESSFULLY THAN WE DO. Competition in the rechargeable battery
industry is intense. The industry consists of major domestic and international
companies, most of which have financial, technical, marketing, sales,
manufacturing, distribution and other resources substantially greater than ours.
There is a risk that other companies may develop batteries similar or superior
to ours. In addition, many of these companies have name recognition, established
positions in the market, and long standing relationships with OEMs and other
customers. We believe that our primary competitors are existing suppliers of
lithium ion, competing polymer and, in some cases, NiMH batteries. These
suppliers include Matsushita Industrial Co., Ltd., Sony, Toshiba, SAFT America,
Inc. and PolyStor Corp. All of these companies are very large and have
substantial resources and market presence. We expect that we will compete
against manufacturers of other types of batteries in our targeted application
segments, which include laptops, cellular phones and personal digital assistance
products, on the basis of performance, cost and ease of recycling. There is also
a risk that we may not be able to compete successfully against manufacturers of
other types of batteries in any of our targeted applications.
OUR SUCCESS DEPENDS HEAVILY ON OUR SENIOR MANAGEMENT PERSONNEL AND ON OUR
ABILITY TO ATTRACT AND RETAIN KEY EMPLOYEES. Our success is highly dependent
upon the active participation of our senior management personnel. We do not have
written employment contracts with any key employees and do not maintain key man
life insurance policies for any of our employees. We believe that our future
success will depend in large part on our ability to attract and retain highly
skilled technical, managerial and marketing personnel who are familiar with and
experienced in the battery industry as well as skilled personnel to operate our
facility in Northern Ireland. Competition for personnel, in particular for
product development and product implementation personnel, is intense, and we
compete in the market for personnel against numerous companies, including
larger, more established competitors with significantly greater financial
resources than us. The availability of skilled and unskilled workers in Northern
Ireland is limited due to a relatively low unemployment rate. From time to time
we experience difficulty in recruiting qualified personnel, and we cannot be
certain that we will be successful in attracting and retaining skilled
personnel. If we are unable to attract and retain other qualified personnel, we
may not be able to staff our manufacturing facility to operate at full capacity,
which could delay our production of batteries and cause us to breach our
obligations under existing or new purchase orders. Also, if we cannot attract
and retain experienced sales and marketing personnel, we may not achieve the
visibility in the marketplace that we need to obtain purchase orders, which
would have a material adverse effect on our financial condition.
WE FACE A RISK THAT OUR PENDING PATENT APPLICATIONS WILL NOT RESULT IN ISSUED
PATENTS AND THAT OUR ISSUED PATENTS WILL NOT PROVIDE PROTECTION AGAINST
COMPETITORS. Our ability to compete successfully will depend on whether we can
protect our proprietary technology and manufacturing processes. We rely on a
combination of patent and trade secret protection, non-disclosure agreements,
and cross-licensing agreements. These measures may not be adequate or safeguard
the proprietary technology underlying our batteries. In addition, employees,
consultants, and others who participate in the development of our products may
breach their non-disclosure agreements with us, and we may not have adequate
remedies for any such breach. Moreover, our competitors may be able to develop
products that are equal or superior to our products without infringing on any of
our intellectual property rights. We intend to pursue enforcement and defense of
our patents and our other proprietary rights. We could incur significant
expenses in preserving our proprietary rights and these costs could have a
material adverse effect on our financial condition. In addition, we may not be
able to effectively protect our intellectual property rights outside of the
United States. If existing or future patents containing broad claims are upheld
by the courts, the holders of such patents could require companies to obtain
licenses. If we are found to be infringing third party patents, there is a risk
that we may not be able to obtain licenses to such products on reasonable terms,
if at all. Our failure to protect our proprietary technology may materially
adversely affect our financial condition and results of operations. Patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature
tends to lag behind actual discoveries by several months, we cannot be certain
that we were the first creator of inventions covered by pending patent
applications or the first to file patent applications on such inventions.
Therefore, our pending patent applications may not result in issued patents and
any of our issued patents may not afford protection against a competitor.
OUR BATTERIES CONTAIN POTENTIALLY DANGEROUS MATERIALS, WHICH COULD EXPOSE US TO
LIABILITY. In the event of a short circuit or other physical damage to a
battery, a reaction may result with excess heat or a gas being released and, if
not properly released, may be flammable or potentially even explosive. Our
batteries, based on an earlier (and since abandoned) technology, have smoked,
caught fire and vented gas in the past, and we have attempted to design our
current batteries to reduce this risk; if we are unsuccessful in these efforts,
we could be exposed to product liability litigation. In addition, our batteries
incorporate potentially dangerous materials, including lithium. While we believe
the materials in our batteries are less reactive than other potentially
dangerous materials found in other types of batteries, it is possible that these
materials will require special handling. It is possible that safety problems may
develop in the future. We are aware that if the amounts of
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active materials in our batteries are not properly balanced and if the
charge/discharge system is not properly managed, a dangerous situation may
result. Other battery manufacturers using technology similar to ours include
special safety circuitry within the battery to prevent such a condition. We
expect that our customers will have to use this type of circuitry.
WE HAVE NOT COMPLETED SAFETY TESTING OUR BATTERIES AND MAY NOT BE ABLE TO MAKE
COMMERCIAL SALES OF OUR BATTERIES UNTIL WE SUCCESSFULLY COMPLETE SUCH TESTS. We
have conducted safety testing of our batteries and have submitted batteries to
Underwriters Laboratories for certification, which is required by many OEMs
prior to placing a purchase order with the Company. We cannot assure you that
Underwriters Laboratories will certify our batteries. As part of our safety
testing program, prototype batteries of various sizes, designs and chemical
formulations are subject to abuse testing, where the battery is subjected to
conditions outside the expected normal operating conditions of the battery.
While some prototype batteries have survived these tests, others have vented
gases containing vaporized solvents and have caught fire. These results were
generally expected, and until we have completed testing we cannot make a
complete determination as to the conditions in which the battery must be
operated. Additionally, each new battery design requires new safety testing.
Therefore, safety problems may develop with respect to our battery technology
that could prevent or delay commercial introduction.
SAFETY RISKS IN OUR FACILITIES COULD DELAY PRODUCTION AND ADVERSELY AFFECT
OPERATIONS. There is a risk that an accident in our facilities will occur. Any
accident, whether with the use of a battery or in our operations, could result
in significant manufacturing delays or claims for damages resulting from
injuries, which would adversely affect our operations and financial condition.
WE DO NOT FULLY CONTROL OUR JOINT VENTURE OPERATIONS, STRATEGIES AND FINANCIAL
DECISIONS AND WE CANNOT ASSURE YOU THAT OUR PRODUCTS WILL BE MARKETED
SUCCESSFULLY THROUGH THESE VENTURES. We do not control or manage either of our
operating joint ventures. Consequently, we are required to depend on the
management of our venture partners to successfully operate these ventures. There
is a risk that our joint venture partners may have economic, business or legal
interests or goals that conflict with ours or that we may be required to fulfill
obligations of our joint venture partners if they are unable to meet their
obligations. Any significant disagreements with our venture partners could have
a material adverse effect on our ventures. Also, we depend to a significant
degree on local partners in our joint ventures to provide us with regulatory and
marketing expertise and familiarity with the local business environment. Any
disruption in our relationship with these parties could make it more difficult
to market our products in the geographic regions or to the customers to which
the joint venture relates. Also, if these ventures are not successful, they
could significantly damage our reputation, which will make it more difficult to
obtain purchase orders for our batteries.
WE DO NOT HAVE A COLLABORATIVE PARTNER TO ASSIST US IN DEVELOPMENT OF OUR
BATTERIES, WHICH MAY LIMIT OUR ABILITY TO DEVELOP AND COMMERCIALIZE OUR
PRODUCTS. We have received substantially all our revenues to date from a
research and development agreement with Delphi Automotive Systems Group, which
we completed in May 1998. The Delphi agreement was for joint development in the
automotive market. Although we have held discussions with OEMs in the portable
consumer electronics and telecommunications markets about possible strategic
relationships as a means to accelerate introduction of our batteries into these
markets, we may not be able to enter into any such alliances. The use of
alliances for our development, product design, volume purchase and manufacturing
and marketing expertise can reduce the need for development and use of internal
resources. Further, even if we could collaborate with a desirable partner, there
is a chance that the partnership may not be successful. The success of any
strategic alliance that we may enter into depends on, among other things, the
general business condition of the partner, its commitment to the strategic
alliance and the skills and experience of its employees.
A STRICT REGULATORY ENVIRONMENT MAY DEVELOP WHICH MAY DELAY SHIPMENTS AND IMPOSE
ADDITIONAL COSTS ON US. At the present time, neither the storage, use or
disposal of the component parts of our batteries nor the transport of our
batteries is regulated by federal, state or local law. However, we expect that
laws and regulations may be enacted in the future which could impose
environmental, health and safety controls on the storage, use, and disposal of
certain chemicals and metals used in the manufacture of lithium polymer
batteries as well as regulations governing the transport of our batteries.
Satisfying any future laws or regulations could require significant time and
resources from our technical staff and possible redesign which may result in
substantial expenditures and delays in the production of our product, all of
which could have a material adverse effect on our business.
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THE FAILURE OF OUR KEY SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD
NEGATIVELY IMPACT OUR BUSINESS. We use a number of computer software programs
and operating systems in our internal operations, including applications used in
financial business systems and various administration functions. To the extent
that these software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000," some level of
modification or even possible replacement of such source code or applications
will be necessary. To our knowledge, we have not seen any significant events
within our organization or our suppliers to date.
POLITICAL INSTABILITY IN NORTHERN IRELAND MAY DELAY PROGRESS IN OUR NORTHERN
IRELAND FACILITY. Despite the recent peace accord in Northern Ireland, we cannot
assure you that instabilities will not continue in the future. Any political
instability in Northern Ireland could delay our manufacturing of batteries. Any
delays could also cause us to lose sales and marketing opportunities, as
potential customers would find other vendors to meet their needs.
CORPORATE INSIDERS OR AFFILIATES WILL BE ABLE TO EXERCISE SIGNIFICANT CONTROL
OVER MATTERS REQUIRING STOCKHOLDER approval. As of December 26, 1999, our
officers, directors, and their affiliates as a group beneficially owned
approximately 20.91% of our outstanding common stock. As a result, these
stockholders will be able to exercise significant control over all matters
requiring stockholder approval, including the election of directors and the
approval of significant corporate transactions.
ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER OR THOSE WHICH APPLY TO US BY
VIRTUE OF THE APPLICATION OF DELAWARE GENERAL CORPORATION LAW WILL MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE A MAJORITY INTEREST OF OUR OUTSTANDING
VOTING STOCK. Our Board of Directors has the authority to issue up to 50 million
shares of undesignated preferred stock and to determine the price, rights,
preferences, and privileges of those shares without any further vote or action
by the stockholders. As of October 31, 1999, holders of the Series A Preferred
Stock had converted all outstanding shares of the Series A Preferred Stock. The
rights of the holders of our capital stock are subject to the rights of the
holders of the Series B Preferred Stock, 3,500 shares of which currently are
outstanding, and will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
The issuance of additional shares of preferred stock could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock. In addition, we are subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibits us from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. The application of Section 203
also could have the effect of delaying or preventing a change of control of
Valence. Furthermore, our classified Board of Directors and certain other
provisions of our Certificate of Incorporation may have the effect of delaying
or preventing changes in control or management, which could adversely affect the
market prices of our common stock and Series B Preferred Stock.
IF THE ISSUANCE OF OUR PREFERRED STOCK VIOLATED THE NASDAQ STOCK MARKET'S
LISTING MAINTENANCE REQUIREMENTS, OR IF WE OTHERWISE FAIL TO CONTINUE TO MEET
THE NASDAQ STOCK MARKET'S LISTING MAINTENANCE REQUIREMENTS, THE NASDAQ STOCK
MARKET MAY DELIST OUR COMMON STOCK. In late January 1999, The Nasdaq Stock
Market released its guidance on "future priced securities" and the necessity of
the issuer to comply with The Nasdaq Stock Market's listing maintenance
requirements in issuing these securities. In the event that The Nasdaq Stock
Market determined that the issuance of our Series A Preferred Stock and/or
Series B Preferred Stock was in violation of these listing maintenance
requirements, or if we are otherwise unable to continue to meet its listing
maintenance requirements, The Nasdaq Stock Market might delist us. Delisting
would have a material adverse effect on the price of our common stock and on the
levels of liquidity currently available to our stockholders. We may not be able
to satisfy these listing requirements on an ongoing basis.
CONVERSION OF PREFERRED STOCK AND SALES OF COMMON STOCK BY CC INVESTMENTS MAY
DEPRESS THE PRICE OF OUR COMMON STOCK AND SUBSTANTIALLY DILUTE YOUR STOCK. If CC
Investments, a 4.9% stockholder of Valence, were to exercise all of the warrants
it holds and convert all of the shares of preferred stock it owns, as of
December 26, 1999 it would have acquired approximately 1,511,542 shares of our
common stock. The number of shares into which the preferred stock converts
increases at 6% per year. If CC Investments exercises the warrants or converts
its preferred stock into shares of our common stock and sells the shares into
the market, such sales could have a negative effect on the market price of our
common stock and would dilute your holdings in our common stock. Additionally,
dilution or the potential for dilution could materially impair our ability to
raise capital through the future sale of equity securities.
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<PAGE>
VARIABLE CONVERSION OF SERIES B PREFERRED STOCK. CC Investments holds all of our
outstanding Series B Preferred Stock. The conversion price of our Series B
Preferred Stock is variable and may depress the price of our common stock and
substantially dilute your stock. Since July 27, 1999, our Series B Preferred
Stock is convertible into a larger amount of shares when our common stock trades
at a price below $6.03 in six out of ten consecutive trading days. For example,
if on December 26, 1999 our common stock in the previous ten trading days had
been trading at or above $6.03, the remaining 3,500 shares of Series B Preferred
Stock held by CC Investments would have been convertible into approximately
616,020 shares of our common stock. If, however, on that date the average of the
lowest six closing bid prices of our common stock over the previous ten trading
days (referred in the table below as the "average price") had been lower than
$6.03, then the Series B Preferred Stock would have converted into a greater
number of shares.
The following table illustrates this effect:
NUMBER OF SHARES INTO WHICH
3,500 SHARES OF SERIES B PREFERRED
AVERAGE PRICE WOULD CONVERT
If our common stock trades at a price below $6.03
in six out of ten
consecutive trading days
$6.03.................................... 616,020
$5.00.................................... 742,921
$4.00.................................... 928,651
$3.00.................................. 1,238,201
The effect of this variable conversion rate, if applicable, will be to depress
further the market price of our common stock and to dilute further stockholder
holdings in our common stock.
OUR STOCK PRICE IS VOLATILE. The market price of the shares of our common stock
has been and is likely to continue to be highly volatile. Factors such as the
fluctuation in our operating results, announcements of technological innovations
or new commercial products by us or our competitors, failure to achieve
operating results projected by securities analysts, governmental regulation,
developments in our patent or other proprietary rights or our competitors'
developments, our relationships with current or future collaborative partners,
and general market conditions may have a significant effect on the market price
of our common stock. We do not pay, or expect to pay, dividends to the holders
of our common stock. We have never paid any cash dividends and do not anticipate
paying cash dividends on our common stock in the foreseeable future.
YOU MAY EXPERIENCE DILUTION. The offering of shares of common stock in
connection with the Offering may result in an adjustment to the exercise or
conversion price of certain warrants and other convertible securities. If an
adjustment is made, you will experience dilution.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's exposure to market risk since
March 28, 1999.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
27 Financial Data Schedule
b. REPORTS ON FORM 8-K
1. Form 8-K filed January 7, 2000 announcing sale of common stock to
Capital Guardian Trust Company on behalf of its clients.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
VALENCE TECHNOLOGY, INC.
(Registrant)
Date: February 9, 2000 By: /S/ JAY L. KING
-----------------------------------
Jay L. King
Vice President and Chief Financial
Officer
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EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT
- -------------- -------
27 Financial Data Schedule
Page 25
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<NAME> VALENCE TECHNOLOGY, INC.
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-26-2000
<PERIOD-START> SEP-27-1999
<PERIOD-END> DEC-26-1999
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2,093
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<COMMON> 216,214
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